Factory order books fell at their fastest rate in more than two years in September and UK companies expect to cut output at the sharpest pace in nearly seven years.

Factory order books fell at their fastest rate in more than two years in September and UK companies expect to cut output at the sharpest pace in nearly seven years as the global economic downturn bites harder, a survey by the Confederation of British Industry showed yesterday.

The CBIs monthly industrial trends total order books balance fell to -26 from -13 in August - the worst reading since January 2006.

The output expectations balance fell to -16 from -13, the lowest since December 2001, and even more alarmingly for the sector's prospects, the export orders balance fell to -25 from -9, the lowest since October 2005, despite sterling's recent slide.

Policymakers at the Bank of England have been counting on the weakness of the pound against the euro and the dollar to boost exports and helping restore economic growth next year.

"Manufacturers have been hit harder than expected by the economic slowdown with demand falling sharply, and they are not optimistic about the next three months, with output expectations having fallen further," said Ian McCafferty, chief economic adviser to the CBI.

"But there are further signs that the Bank of England should consider cutting rates soon. Inflationary pressure is starting to fall, with fewer manufacturers now expecting price rises over the next three months than in our previous recent surveys. We believe the Bank should have room to reduce rates by half a point in November, and this new survey reinforces our call for a cut."

Howard Archer, chief UK and European economist for consultants Global Insight, described the CBI survey as "more grim news" for the manufacturing sector, adding that it "reinforces belief that the sector is now firmly in recession".

He added: "The survey showed sharply weaker order books, plunging foreign demand and rising stocks of finished products.

"Unsurprisingly given this backdrop, production expectations were at their lowest level since mid- 2001.

"However, the CBI survey contained some welcome news on the inflation front for the Bank of England. Specifically, the balance of manufacturers expecting to raise their prices over the next three months retreated markedly to +23% in September from +31% in August and an eighteen-and-a-half year high of +34% in July. This suggests that sharply weakening demand and activity is starting to dilute manufacturers' pricing power.

"In addition, the recent sharp fall in oil and commodity prices should reduce manufacturers' costs, easing the pressure on them to try and raise their prices."

He went on to say the report showed "sharply markedly weaker manufacturing activity and easing price pressures supports the case for interest rates to be cut before the end of the year."

The survey was carried out between August 26 and September 10. A total of 552 manufacturers responded.